Subprime housing woes rekindle fears for US economy

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WASHINGTON, July 12 (AFP): Fresh troubles in the subprime segment of the US housing market have reignited fears of contagion that could affect the broad financial sector and possibly the broader economy, analysts say.
Those fears were fanned this week as rating agencies Standard & Poor's and Moody's both warned of potential credit downgrades for bonds backed by subprime mortgages, which could affect investors and banks that issued the obligations.
"New data reveals that delinquencies and foreclosures continue to accumulate at an increasing rate," S&P said.
"We see poor performance of loans, early payment defaults, and increasing levels of delinquencies and losses."
The news triggered a slide in the US dollar and Wall Street shares Tuesday as investors reassessed their exposure to risky assets like mortgage-backed securities.
Subprime loans that flourished during the last part of the housing boom provided mortgages to people with poor credit histories, often allowing them to buy homes beyond their means through low "teaser" rates.
Many of the loans with adjustable rates or interest-only payments for the first year or two are being recalculated higher, making payments harder.
Industry figures showed the delinquency rate for all mortgages at 4.84 per cent in the first quarter but 13.77 per cent for subprime loans. Foreclosures were taking place at 0.58 per cent of properties, but 5.1 per cent for subprime.
David Kotok, chairman at Cumberland Advisers, said the billions of dollars in problem loans could have a major economic impact.
He said the slump in housing is already affecting some firms like Home Depot, the big home-improvement retailer. And he said some hedge funds that invested during the property boom are now in trouble too.
"Housing finance is huge. Hundreds of billions of debt instruments are involved in this deterioration," Kotok said.
"We have seen hedge funds stop funding withdrawals and we have seen hedge fund sponsors attempt to stem the tide with capital infusions (Bear Stearns). There is much more bleeding to come."
Some fear that the subprime crisis will prompt lenders to tighten standards and curtail mortgages. Fewer buyers will mean the glut of homes will increase and prices may fall further.
Moreover, a weak housing market may have what economists call a "negative wealth effect," prompting consumers to curb spending as they see home values decline. Auto sales last month were far weaker than expected.
Up to now, said Deutsche Bank economists Joseph LaVorgna and Carl Riccadonna, consumer spending has generally held up, but they find this perplexing and see an eventual pullback.
"We expect some payback in June retail sales, particularly after the disappointing data on June motor vehicle sales last week, the question is how big that payback will be," they said in a note.
Sal Guatieri, economist at BMO Capital Markets, said the troubles in housing will continue to drag on the overall economy.